Insurance Policy Warranties

A Warranty in Insurance is a Special Type of Promise

The following was adapted from “Insurance Claims: A Comprehensive Guide” available in two volumes for only $75 (reduced from $196) from ClaimSchool, Inc. at http://www.zalma.com/zalma-books/

Promissory Warranty

A promissory warranty applies to the date of the application and the
future. It is a statement of a promise to keep a certain fact or set of facts
in existence throughout the period of a policy. Failure to comply during
the effective dates of the policy is a breach of a material warranty that
invalidates the policy.

Promissory warranties require certain action or non-action of the
insured after the policy has been entered into in order that its terms shall not
thereafter be breached. Some examples of promissory warranties include
the following statements:

• “I will keep my premises protected by a silent, central station
reporting fire alarm system.”

• “I will have a watchman on premises whenever my business is
closed.”

• “I will have a security guard on premises when I am open for
business.”

• “I will keep my safe locked at all times when I am closed.”

• “I will keep records sufficient to allow my insurer to determine
the exact amount of any loss without assistance or explanation
from me.”

The California Insurance Code does allow an excuse for failure to
fulfill a future warranty, but only as follows:

When, before the time arrives for the performance of a
warranty relating to the future, a loss insured against happens,
or performance becomes unlawful at the place of
the contract, or impossible, the omission to fulfill the warranty
does not avoid the policy. California Insurance Code
§ 446.
(d) Implied Warranty
An “implied warranty” is not specifically expressed in the
policy language but from the actions of the parties to the
contract a court (as trier of fact) finds it to be the basis of
the insurance contract. California Insurance Code § 440.

For example:

• There is an existing sprinkler system at the time of purchase of
insurance and at the time of inspection.

• At the time the insurer inspects the property there is an on-site
manager who tells the inspector he has worked there for 15 years.

• The insured, without being asked, provides the insurer a monthly
report of values.

The breach of a single warranty, at the time of the application, keeps
the policy from attaching to the risk. Nothing is or was insured because
the insurer and the insured never agreed on the terms of the contract of
insurance. The insurer was deceived and the contract is void or voidable.
Every warranty, at the inception of the policy, is material to the
decision of the insurer to insure, or not insure, the insured. The existence
of any false material warranty prevents the policy from attaching to the risk
even if the breach was innocent, unintentional, and without fraud.

A breach of warranty without fraud merely exonerates an
insurer from the time that it occurs, or where the warranty
is broken in its inception, prevents the policy from attaching
to the risk. California Insurance Code § 449.

It is the obligation of an insured to inform its insurer of every material
fact necessary to the decision of the insurer to insure or not insure a risk,
whether asked or not.

[A] statement or promise set forth in the policy, or by reference
incorporated therein, the untruth or nonfulfillment of
which in any respect, and without reference to whether the
insurer was in fact prejudiced by such untruth or nonfulfillment,
renders the policy voidable by the insurer, wholly
irrespective of the materiality of such statement or promise.
Vance, The Law of Insurance (Third edition, Anderson,
1951, at p. 408) as cited in Insurance Law, Keeton and
Widiss, supra.; Imperial v. Sogomonian, infra.; Fidelity Mut.
Life Ass’n of Philadelphia V. Ficklin, supra; and Monahan
v. Mutual Life Ins. Co. Of Baltimore, supra.

Since warranties are required to be literally true for the policy to attach
to the risk, the question of materiality is not an issue. An untrue answer,
even if it relates to an immaterial matter, could, at that point in time, if
warranted to be true, prevent recovery upon the policy. Therefore, if a
misstatement appeared as to a matter warranted to be true, it is no defense
that the insured acted innocently or in good faith in so doing, and there can
be no recovery, particularly where the matter that is warranted is material to
the risk. Appleman, Insurance Law and Practice, Vol. 12A (Rev. Ed. 1981)
§ 7354. The Ninth Circuit, in Certain Underwriters at Lloyds, London v.
Inlet Fisheries Inc. 06-35383 Feb. 11, 08, D.J. cite: 2008 DJDAR 2181
found that the doctrine of uberrimae fidei (utmost good faith) required a
marine insurance applicant to disclose all facts material to the calculation of
risk. Even if not asked, the insured had a good faith duty to reveal material
facts about its vessels in applying for insurance. Rescission by the insurer
was proper because it was deceived.

The California Insurance Code is quite clear on the subject of what
remedy is available to a party to an insurance contract when a warranty is
violated:

The violation of a material warranty or other material provision
of a policy, on the part of either party thereto, entitles
the other to rescind. California Insurance Code § 447.
Therefore, simply stated, a violation by the insured of any one material warranty is sufficient to void the insurance policy.

The Records Warranty

Many first party property policies, and almost all inland marine
policies, contain a records clause or warranty that requires the insured to
maintain sufficient records to prove the amount of his or her loss. All records
clauses are called “iron safe clauses” because they originally required that
the records be locked in a “fireproof iron safe.” The requirement for an iron
safe is disappearing because of the ability to store records electronically off
site. A common form of iron safe clause will provide:

1. The insured will take a complete itemized inventory of stock
on hand at least once in each calendar year and, unless
such inventory has been taken within twelve calendar
months prior to the date of this policy, one shall be taken in
detail within 30 days of issuance of this policy, or this policy
shall be null and void from such date, and upon demand of
the insured the unearned premium from such date shall be
returned.

2. The insured will keep a set of books, which shall clearly and
plainly present a complete record of business transacted,
including all purchases, sales and shipments, both for cash
and credit, from date of inventory, as provided for in the first
section of this clause, and during the continuance of this
policy

3. The insured will keep such books and inventory, and also
the last preceding inventory, if such has been taken, securely
locked in a fireproof safe at night, and at all times when
the building mentioned in this policy is not actually open for
business; or, failing in this, the insured will keep such books
and inventories in some place not exposed to a fire which
would destroy the aforesaid building.

In the event of failure to produce such set of books and
inventories for the inspection of this Company, this policy
shall become null and void, and such failure shall constitute
a perpetual bar to any recovery thereon. [As quoted
in Burchfield v. United States Fidelity & Guaranty Co., 238
Miss. 416 (Miss.03/14/1960).]

The Mississippi Supreme Court held that since the records required
were not protected in a fire proof iron safe:

The destruction or theft of books and papers required by
a policy of insurance to be kept or produced will excuse a
noncompliance with requirement if due to no fault or design
of the insured. If, however, the destruction of such papers is
due to the negligent failure of the insured to preserve them
as required by the policy, his failure to produce them in
accordance with the requirement of the policy will preclude
any recovery thereon. [In the footnote to this statement
there is again cited the said case of Joffe v. Niagara Fire
Insurance Company, supra.] Furthermore, if no such books
and inventories are kept as are required by a fire insurance
policy, the loss of those which were kept will not excuse the
failure of the insured to meet the requirement.

The Supreme Court of Washington found that:

the requirement [to maintain an inventory and books and
records] as a matter of law is not fulfilled when the books
present a record of values only that are added and taken
away. The object of having an itemized inventory and of
keeping in the course of business a record of property
added and taken away “was not to ascertain the gross
value of the property insured, but to ascertain the different
articles which went to make up the stock in order that the
insurance company might test the correctness of the claim”
of the assured. Georgian House of Interiors Inc. v. Glens
Falls Insurance Co., 21 Wash. 2d 470, 151 P. 2d 598 (Wa.
09/07/1944).

In Kentucky, the Court of Appeal, even though it found a waiver of the
condition, held:

When we resort to the decisions of other jurisdictions, however,
we find that virtually every court, state or federal, that
has considered this precise question has decided almost
without exception that the books and records themselves
must accurately supply the necessary information without
the aid of oral testimony except to explain the method of
keeping them. Westchester Fire Ins. Co. v. Gray, 240 S.W.
2d 825 (Ky. App. 06/19/1951).

Moreover, the Delaware Supreme Court has held that a bookkeeping
provision is a promissory warranty, and the insured must show at least a
substantial compliance to recover under the insurance policy.

The U.S. Supreme Court analyzed an iron safe clause as follows:

Turning now to the words of the policies in suit, what is the
better and more reasonable interpretation of those provisions
so far as they relate to the issues in this case? The
covenant and agreement “to keep a set of books showing
a complete record of business transacted, including all purchases
and sales, both for cash and credit, together with the
last inventory of said business,” should not be interpreted
to mean such books as would be kept by an expert bookkeeper
or accountant in a large business house in a great
city. That provision is satisfied if the books kept were such
as would fairly show, to a man of ordinary intelligence, “all
purchases and sales, both for cash and credit.” Liverpool &
London & Globe Insurance Co. v. Kearney, 180 U.S. 132,
21 S. Ct. 326, 45 L. Ed. 460.

Even if an insured is in business in a little country town, and his
books, kept in a most primitive style, are far from being what a good
accountant would consider a complete set of books, if the insured kept
a set of books which were as good as ordinarily kept in such a store
and business, and exercised good faith in the matter, his policy was not
avoided merely by the fact that the books were not what an expert would
consider a complete set of books. When the insured’s books are kept
in the manner customary with merchants like the insured, and are as
elaborate and complete as is usually the case in stores of like character,
it is sufficient.

In Louisiana, substantial compliance with the iron safe clause is
sufficient, but if that is lacking the policy is defeated. Gershon v. North
River Ins. Co., 177 La. 148, 148 So. 10, 92 A.L.R. 368. A proper inventory
was lacking in that case:

We find no Louisiana case holding that, in a retail store
where cash sales are made, a complete record of the cash
so received, though it does not indicate what particular
goods were sold, is not a substantial compliance as to such
sales. The “iron safe” clause does not expressly require
a record which will disclose the identity or the cost of the
goods sold.

The iron safe clauses found in most commercial and all inland marine
policies are important tools in the fight against insurance fraud. A person
who will perpetrate a fraudulent claim or who will burn down a business to
profit from an insurance policy may be an expert at fraud but know nothing
about insurance. If the books and records of the business do not comply
with the policy condition—and since the claims are fraudulent they seldom
will—an effective defense without the need to accuse the insured of fraud
will protect the assets of the insurer.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

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The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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